October 7, 2008

Why I'm Ignoring The Dead Cat

Yesterday, the stock market took a huge nose dive. Again. This morning, the big news on CNN.com ("I Can't Believe This Is News!") is that the bulls were out in force for pre-opening trading. (If there is trading going on before the market opens, what exactly does it mean for the market to open in the first place?) I'm thinking, though, that what's going on today is what my retirement advisor cautioned me is called a "dead cat bounce." When you toss a cat out an twelve-story window, it dies. The fact that the cat's body bounces a little bit immediately after impact should not be mistaken for a sign of life. So too with the market.

It seems to me that when it looks like things are finally bottomed out, that's the time to switch to more aggressive kinds of investments. Now is the time to either switch to low-risk, non-volatile kinds of instruments, or if the transaction costs are significant, just stand pat. But leaving the market completely would simply lock in the losses you've just sustained.

What it takes to start driving prices up again will be earnings. Right now, everybody's losing money. So investors don't see a reason to start paying good money for bad stocks. When the stocks start generating dividends again, the prices will rise. This will happen. Eventually, people will figure out how to make money again in our new economic environment. And then stocks will rise. That's the point when you want to get aggressive, and ride the upward wave. We're not there yet.

2 comments:

bobvis said...

They don't always die.

I agree that I may be early, but I'm getting in now.

Dave said...

Ride the downward wave too! If you dollar-cost average aggressively during a down-cycle, you win twice. You're buying low as it goes down and you buy low as it rises back up to the baseline price. Don't just ride up!